Purchase of property in India from Non-Resident Indians (NRI) is a bit tricky when compared to buying it from Resident Indians.
TDS at the time of buying the property – You may be aware about Tax Deduction at Source (TDS) to be done at the rate of 20.6% in case the sale price is less than Rs.1 Crore or 22.66% in case the sale price is over Rs.1 Crore.
Non Deduction of Tax – You or your consultant have no power to reduce TDS percentage. Only Income Tax Officer (ITO) is authorized to reduce TDS percentage. For this one has to apply (buyer or seller) to ITO and get the certificate. You can read How to obtain TDS exemption certificate from Income Tax officer to know more about it.
Consequences of Non Deduction of Tax – Suppose you failed to deduct tax (TDS) and paid the entire sale consideration to the seller at the time of buying the property. You will have trouble from Tax department. The department can paint you as ‘Assessee in default’ and recover the entire tax dues from you.
What will happen if the taxes are paid by the seller directly?
This can be explained through two examples –
Example A: Let’s assume that you are buying a property from Mr.Duniya (a NRI) for Rs.1.20 Crores on 25th May 2014. As per the law, you are obliged to deduct tax (TDS) at the rate of 22.66%, i.e Rs.27,19,200 and remit it to the government. The balance amount of Rs.92,80,800 to be paid to the seller.
Suppose, you failed to deduct the tax, but the seller has paid the entire tax on, say 10th July 2014. In such case, the department can’t ask you to pay the taxes again. Once the applicable taxes are paid by the seller, the department will condone the default of non deduction of tax.
Example B: Suppose, in the above example, the seller pays the applicable taxes in June, 2015 (at the time of filing his income tax return). Then the department can levy interest at the rate of 12% simple interest u/s 201(1A) till the date of payment of taxes by the seller. In this case, the seller was supposed to pay taxes as advance tax during the financial year 2014-15. Since he has not paid it, the buyer has to pay Rs.3,26,304 (for 12 months i.e., from June 2014 to June 2015 at 12% p.a)
Apart from the interest, the department can also levy penalty u/s 271C towards ‘failure to deduct tax at source’. The penalty amount is equal to tax deducted or paid!
Precautions to be taken – We suggest all readers of this article to take note of these aspects seriously. Please be aware that the department will come back after couple of years and not in the year of sale! The non-compliance of TDS provisions will cost the buyer heavily.
- 7 things you must know about Income Tax before buying property from Non Resident Indian (NRI)
- The TDS provisions on Sale of properties by Resident Indians and Non-Residents
- TDS on sale of immovable property
- TDS on purchase of immovable property
Thought for the day
Do what is right, not what is easy.